Ni Luh Putu Amara Prabasari

119211078
Accounting IC

The Human Resources Management

and Payroll Cycle

The human resources management (HRM)/payroll cycle is a recurring set of business

activities and related data processing operations associated with effectively managing the
employee workforce. The more important tasks include the following:
1. Recruiting and hiring new employees
2. Training
3. Job assignment
4. Compensation (payroll)
5. Performance evaluation
6. Discharge of employees due to voluntary or involuntary termination
This chapter focuses primarily on the payroll system, because accountants have
traditionally been responsible for this function. We begin by describing the design of the
integrated HRM/payroll system and discuss the basic controls necessary to ensure that it
provides management with reliable information and complies with government regulations. We
then describe in detail each of the basic payroll cycle activities. We conclude with a discussion
of options for outsourcing both payroll and HRM functions.

HRM/Payroll Cycle Information System

The HRM-related activities (information about hiring, firing, transfers, training, etc.) and
the collection of information about the use of employee time occur daily. The actual processing
of payroll, however, occurs only periodically because in most organizations employees are paid
on a weekly, biweekly, or monthly basis rather than every day. Thus, payroll is one application
that continues to be processed in batch mode.
a. Overview of HRM Process and Information Needs
Organizational success depends on skilled and motivated employees because their
knowledge and skills affect the quality of the goods and services provided to customers.
Indeed, in professional service organizations, such as accounting and law firms,
employees’ knowledge and skills are the principal component of the company’s product,
and labor costs represent the major expense incurred in generating revenues. Even in
manufacturing firms, where direct labor costs represent only a fraction of total direct
 costs, employees are a key cost driver in that the quality of their work affects both overall
productivity and product defect rates. Thus, it is not surprising to find that some stock
analysts believe that employee skills and knowledge may be worth several times the
value of a company’s tangible assets such as inventory, property, and equipment.
b. Threats and Controls
The main common threats listed are inaccurate or invalid master data. To reduce
the threat of inaccurate or invalid master data, using various integrity controls to check
the risk of input data errors. The second common threat in the HRM / Payroll cycle is the
unauthorized disclosure of sensitive information, such as salaries and performance
evaluations for individual employees.The third common threat in the HRM / Payroll
cycle relates to missing or corrupted master data. The fourth common threat in the HRM /
Payroll cycle is an unqualified employee or even a thief. The fifth common threat in the
HRM / Payroll cycle is over the laws and regulations regarding the proper hiring and
firing of employees.
Threats of General issues throughout entire HRM/payroll cycle:
 Inaccurate or invalid master data
 Unauthorized disclosure of sensitive information
 Loss or destruction of data
 Hiring unqualified or larcenous employees
 Violations of employment laws
Controls of General issues throughout entire HRM/payroll cycle:
 Data processing integrity controls
 Restriction of access to master data
 Review of all changes to master data
 Access controls
 Encryption
 Backup and disaster recovery procedures
 Sound hiring procedures, including verification of job applicants’
credentials, skills, references, and employment history
 Criminal background investigation checks of all applicants for
financerelated positions
 Thorough documentation of hiring, performance evaluation, and dismissal
procedures
 Continuing education on changes in employment laws

Payroll Cycle Activities

The HRM department provides information about hirings, terminations, and pay-rate
changes due to raises and promotions. Employees initiate changes in their discretionary
deductions (e.g., contributions to retirement plans). The various departments provide data about
actual hours employees work. Government agencies provide tax rates and instructions for
meeting regulatory requirements. Similarly, insurance companies and other organizations
provide instructions for calculating and remitting various withholdings.
Employees receive individual paychecks in compensation for their services. A payroll
check is sent to the bank to transfer funds from the company’s regular accounts to its payroll
account. Checks also are issued to government agencies, insurance companies, and other
organizations to meet company obligations (e.g., taxes, insurance premiums). In addition, the
payroll system produces a variety of reports, which we discuss later, for internal and external
use.
a. Update Payroll Master Database
The first activity in the HRM/payroll cycle involves updating the payroll master
database to reflect various types of internally initiated changes: new hires, terminations,
changes in pay rates, or changes in discretionary withholdings. In addition, periodically
the master data needs to be updated to reflect changes in tax rates and deductions for
insurance.
 Process
HRM department is responsible for updating the payroll master database
for internally initiated changes related to employment, whereas the payroll
department updates information about tax rates and other payroll deductions when
it receives notification of changes from various government units and insurance
companies. Although payroll is processed in batch mode, the HRM department
has online access to update the payroll master database so that all payroll changes
are entered in a timely manner and are properly reflected in the next pay period.
Records of employees who quit or are fired should not be deleted immediately,
however, because some year-end tax reports, including W-2 forms, require data
about all employees who worked for the organization at any time during the year.
 Threats of Update Payroll Master Database
 Update Payroll
 Master Database
 Controls of Update Payroll Master Database
 Segregation of duties: HRM department updates master data, but only
payroll department issues paychecks
 Access controls
 Data processing integrity controls
 Regular review of all changes to master payroll data
b. Validate Time and Attendance Data
 Process
For employees paid on an hourly basis, many companies use a time card to
record the employee’s daily arrival and departure times. Employees who earn a
fixed salary (e.g., managers and professional staff) seldom record their labor
 efforts on time cards. Instead, their supervisors informally monitor their presence
on the job. Professionals in such service organizations as accounting, law, and
consulting firms similarly track the time they spend performing various tasks and
for which clients, recording that data on time sheets. Sales staff often are paid
either on a straight commission or on a salary plus commission basis. This
requires the staff to carefully record the amount of their sales. In addition, some
sales staff are paid bonuses for exceeding targets.
 Threats of Validate Time and Attendance Data
 Inaccurate time and attendance data
 Controls of Validate Time and Attendance Data
 Source data automation for data capture
 Biometric authentication
 Segregation of duties (reconciliation of job-time tickets to time cards)
 Supervisory review
c. Prepare Payroll
 Process
If the organization is processing payrolls from several divisions, each of
these payroll transaction files must also be merged. The sorted payroll
transactions file is then used to prepare employee paychecks. For each employee,
the payroll master file record and corresponding transaction record are read, and
gross pay is calculated. For hourly employees, the number of hours worked is
multiplied by the wage rate, and then any applicable premiums for overtime or
bonuses are added. For salaried employees, gross pay is a fraction of the annual
salary, where the fraction reflects the length of the pay period. For example,
salaried employees paid monthly would receive one-twelfth of their annual salary
each pay period. Any applicable commissions, bonuses, and other incentives are
also included in calculating gross pay.
 Threats of Prepare Payroll
 Errors in processing payroll
 Controls of Prepare Payroll
 Data processing integrity controls: batch totals, cross-footing of the
payroll register, use of a payroll clearing account and a zero-balance check
 Supervisory review of payroll register and other reports
 Issuing earnings statements to employees
 Review of IRS guidelines to ensure proper classification of workers as
either employees or independent contractors
d. Disburse Payroll
The next step is the actual disbursement of paychecks. Most employees are paid
either by check or by direct deposit of the net pay amount into their personal bank
account. Unlike cash payments, both methods provide a means to document the amount
of wages paid.
 Process
 After paychecks have been prepared, accounts payable reviews and
approves the payroll register. A disbursement voucher is then prepared to
authorize the transfer of funds from the company’s general checking account to its
payroll bank account. The disbursement voucher is then used to update the
general ledger.
After reviewing the payroll register and disbursement voucher, the cashier
then prepares and signs a check (or initiates an electronic funds transfer (EFT)
transaction) transferring funds to the company’s payroll bank account. If the
organization still issues paper checks, the cashier also reviews, signs, and
distributes the employee paychecks. The cashier promptly redeposits any
unclaimed paychecks in the company’s bank account. A list of unclaimed
paychecks is then sent to the internal audit department for further investigation.
Some employees, however, may not have bank accounts and, therefore,
cannot elect direct deposit. Organizations can still eliminate the need to issue
paper payroll checks by paying such employees with payroll debit cards. Payroll
debit cards are stored value cards that cannot be overdrawn, but they can be
replenished with additional funds each payday. Employees can use payroll debit
cards to make purchases and can withdraw available cash at ATM machines.
 Threats of Disburse Payroll
 Theft or fraudulent distribution of paychecks
 Controls of Disburse Payroll
 Restriction of physical access to blank payroll checks and the check
signature machine
 Restriction of access to the EFT system
 Prenumbering and periodically accounting for all payroll checks and
review of all EFT direct deposit transactions
 Require proper supporting documentation for all paychecks
 Use of a separate checking account for payroll, maintained as an imprest
fund
 Segregation of duties (cashier versus accounts payable; check distribution
from hiring/firing; independent reconciliation of the payroll checking
account)
 Restriction of access to payroll master database
 Verification of identity of all employees receiving paychecks
 Redepositing unclaimed paychecks and investigating cause
e. Calculate and Disburse Employer-Paid Benefits Taxes and Voluntary Employee
Deductions
 Process
Employers must pay Social Security taxes in addition to the amounts
withheld from employee paychecks. Federal and state laws also require employers
to contribute a specified percentage of each employee’s gross pay, up to a
maximum annual limit, to federal and state unemployment compensation
 insurance funds. In addition to mandatory tax-related disbursements, employers
are responsible for ensuring that other funds deducted from employee paychecks
are correctly calculated and remitted in a timely manner to the appropriate entity.
Such deductions include court-ordered payments for alimony, child
support, or bankruptcy. Many employers also contribute some or all of the
amounts to pay for their employees’ health, disability, and life insurance
premiums as well as making matching contributions to retirement plans. Many
employers also offer their employees flexible benefits plans, under which each
employee chooses some minimum coverage in medical insurance, retirement
plans, and charitable contributions.
 Threats of Calculate and Disburse Employer-Paid Benefits Taxes and Voluntary
Employee Deductions
 Failure to make required payments
 Untimely payments
 Inaccurate payments
 Controls of Calculate and Disburse Employer-Paid Benefits Taxes and Voluntary
Employee Deductions
 Configuration of system to make required payments using current
instructions from IRS (Publication Circular E)
 Processing integrity controls
 Supervisory review of reports 13.3 Employee review of earnings statement

Outsourcing Options: Payroll Service Bureaus and Professional Employer Organizations

A payroll service bureau maintains the payroll master data for each of its clients and
process payroll for them. A professional employer organization (PEO) not only processes payroll
but also provides HRM services such as employee benefit design and administration. Because
they provide a narrower range of services, payroll service bureaus are generally less expensive
than PEOs.
When organizations outsource payroll processing, they send time and attendance data
along with information about personnel changes to the payroll service bureau or PEO at the end
of each pay period. The payroll service bureau or PEO then uses that data to prepare employee
paychecks, earnings statements, and a payroll register. The payroll processing service also
periodically produces employee W-2 forms and other tax-related reports. Payroll service bureaus
and PEOs are especially attractive to small and midsized businesses for the following reasons:
 Reduce Cost
 Wider Range of Benefits
 Freeing Up of Computer Resources
 As the basis for competitive advantage increasingly hinges on employees’ skills and
knowledge, the effective and efficient management of the payroll and HRM functions becomes
increasingly important. Outsourcing may provide a way to reduce costs.